Goldman Surprised by Sudden Oil-Market Turn as Glut Vanishes

The global oil market has flipped to a deficit sooner than Goldman Sachs Group Inc. had expected.

A decline in production driven by unexpected supply disruptions, as well as sustained demand, have resulted in a “sudden halt” to the output surplus, Goldman analysts Damien Courvalin and Jeffrey Currie wrote in a report dated May 15. Other banks such as Morgan Stanley, Barclays Plc and Bank of America Corp. also noted that supply losses are leading markets to rebalance.

The unexpected outages caused by everything from wildfires in Canada to pipeline attacks in Nigeria will keep production below demand through the second half of this year, according to Goldman. Still, the return of some output and higher-than-expected volumes from the U.S., the North Sea, Iraq and Iran mean the shortfall will be 400,000 barrels a day rather than the 900,000 previously predicted, it said. A return to surplus production is seen in early 2017.

“The physical rebalancing of the oil market has finally started,” Goldman said. The bank raised its U.S. crude price forecast for the second half of 2016 to $50 a barrel from $45 estimated in March. It cut its forecast for the first quarter of 2017 to $45 from $55, but sees oil at $60 by the end of that year. The bank expects global demand to grow by 1.4 million barrels a day in 2016, versus 1.2 million predicted previously.

‘Cyclically Bullish’

The changes to forecasts reflect “our long-held view that expectation for long-term surpluses can create near-term shortages and leaves us cyclically bullish but long-term bearish.”

West Texas Intermediate crude, the U.S. benchmark, rose 2.1 percent to $47.18 a barrel on the New York Mercantile Exchange at 7:37 a.m. local time. Front-month futures are up 80 percent from a 12-year low earlier this year. Brent, the marker for more than half the world’s oil, was at $48.80 a barrel in London.

While supply disruptions over the past two weeks have reduced production by 1.5 million to 2 million barrels a day, prices are up only $2 a barrel, reflecting ample inventories, according to Goldman. With stockpiles at historically elevated levels in several countries, the current outages have had little actual impact on the availability of crude, it said, adding that “high product stocks would even allow for lower refinery runs if necessary.”

Inventory Shifts

The pace of withdrawals from inventories is what will drive prices as uncertainty around future supply-demand balances remains “significant,” according to the bank. “The price recovery will remain anchored by near-term inventory shifts, with the oil market less forward-looking than over the past two years,” the analysts wrote.

While stockpiles in the U.S., the world’s biggest crude consumer, shrank in the week ended May 6 for the first time in more than a month, stored supplies remained close to the highest since 1929, data from the Energy Information Administration show.

The oil market “looks set on a course for rebalancing much faster than previously expected,” making the risk of a sharp price drop unlikely, Barclays analysts Miswin Mahesh and Kevin Norrish said in a report. Francisco Blanch, head of commodities research at Bank of America Merrill Lynch, reiterated his forecast for U.S. prices to reach $54 in the fourth quarter as supply retreats. Adam Longson, an analyst at Morgan Stanley, said that while temporary disruptions have moved markets “into balance for now,” the “inventory buffer” is blunting any rally.

Market Drivers

Goldman’s expectation for a return to a production surplus in 2017 reflects the view that low-cost suppliers such as Saudi Arabia, Kuwait, the United Arab Emirates and Russia will continue to drive output growth, the bank said.

“While the physical barrel rebalancing has started, the structural imbalance in the capital markets remains large,” the analysts wrote. “The industry still has further to adjust and our updated forecast maintains the same 2016-2017 price level that we previously believed was required to finally correct both the barrel and capital imbalances.”